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Deleveraging accelerates on strong earnings

Expect deleveraging to drive re-rating

* JSP achieved its highest ever quarterly EBITDA/PAT of INR45.8b/INR23.8b in 3QFY21 supported by a strong pricing environment. Net debt fell by INR33b QoQ to INR256b, implying a net debt/ EBITDA of 2.35x.

* We raise our FY21E/FY22E EBITDA estimates by 11%/4%, to factor in strong pricing trends. JSP is the least levered Indian steel company and we expect net debt to fall further to INR183b (1.6x of EBITDA) by Mar’22, which should drive a re-rating. Reiterate Buy.

Highest ever EBITDA/PAT on the back of strong steel margin

* 3QFY21 consolidated revenue/ EBITDA/ PAT at INR105b/INR45.8b/INR23.8b grew 17%/63%/188% QoQ and was +0%/+30%/+85% against our estimate.

* The beat on our estimate waslargely due to better than expected steel realization and higher consumption of no cost Sarda iron ore inventory.

* Steel (standalone) revenue/EBITDA/PAT at INR87.4b/INR39.1b/INR24b grew 11%/61%/142% QoQ and was +0%/+29%/+72% against our estimate.

* Steel sales (excluding pig iron) declined 3% QoQ to 1.78mt due to lower exports (-48% QoQ to 0.4mt) as domestic sales were strong (+25% QoQ to 1.4mt). Pellet sales declined 45% QoQ to 0.4mt due to higher internal consumption.

* While steel realization rose by ~INR6,200 (14%) QoQ to INR49,029, unitary cost fell by 9% QoQ to INR27,100/t due to higher consumption of Sarda iron ore inventory. As a result, EBITDA/t rose 66% QoQ to INR21,929 (est. INR17,052).

* Power (subsidiary JPL) EBITDA at INR6.3b grew 51% QoQ driven by a 52% QoQ increase in power sales. PLF improved to 56% (v/s 37% in 2QFY21), the highest in five years. Realization fell 8% QoQ to INR3.70/kwh (due to higher merchant sales) which was offset by lower coal cost leading to EBITDA/unit being flat QoQ at INR1.7/kwh. Reported EBITDA was however lower due to one-off provision of INR3.3b.

Focus on deleveraging to continue, capex only on cost saving projects

* The management reiterated its focus on deleveraging the Balance Sheet and guided at achieving net debt and EBITDA of INR150b each by FY23.

* Planned capex is limited with a focus on cost saving projects like pellet plant and slurry pipeline for lowering iron ore transportation cost.

* Sarda iron ore inventory stands at 4.5mt and would last till 1QFY22.

* Gare Palma IV/1 coal block operations should start in 6-8 months.

Margin to stay strong, valuation still attractive

* We expect margin to be extremely strong in the near term (INR23,300/t in 4QFY21E) supported by high prices and benefit of Sarda inventory.

* Start of operations in Gare Palma IV/1 coal block, expected by 2QFY22, would boost JPL’s PLF significantly and improve profitability further.

* Our SoTP-based TP of INR385 is based on 5x FY22E EV/EBITDA for the steel business and DCF valuation for the power business. At the CMP, the stock trades at an attractive 3.7x FY22E EV/EBITDA for the steel business.